Retail credit cards are like hoverboards: popular during the holidays, potentially useful, and liable to throw you off balance at some point and leave you hurting.
Retailers typically see an increase in new store card accounts during the holidays. Research from TransUnion shows that discount stores and online retailers opened new accounts last December at twice the rate of other months; jewelry stores saw a nearly 80% increase, and other types of stores also had significant increases. The credit bureau expects this trend to continue this year, says Nidhi Verma, senior director of research and consulting with TransUnion.
Stores try to capitalize on the holiday rush by sweetening sign-up bonuses or encouraging employees to promote store cards at checkout. But just because everyone’s signing up doesn’t mean you should.
The reason for the rise
Obviously, the millions of shoppers plowing through the aisles this time of year have something to do with spike in new accounts during the holidays. November and December account for up to 30% of annual sales for some companies, according to the National Retail Federation. But that’s only part of the story.
“[Retail credit cards] tend to be more aggressive in their offers during the holidays,” Verma says. Some big-box retailers, such as Sears and Wal-Mart, offer souped-up rewards or discounts on store cards during the holiday season. With certain retailers, you can get as much as 30% off your first purchase.
From bringing out the pumpkin spice air freshener to hiring mall Santas, retailers go to great lengths to get you to spend more during the holidays — and that can make last-minute credit card offers seem more appealing. Some companies also boost sign-ups by requiring employees to pitch these cards or paying bonuses for getting consumers to apply.
Also, store cards offer easy credit when people need it most. TransUnion noticed the biggest lift in applications during the holidays among cardholders with fair credit or poor credit, Verma notes. Those same consumers might have trouble qualifying for general-purpose credit cards, which usually require a credit score above about 660. Many store cards will approve applicants with lower scores.
Why you should say no
Retail credit cards are a terrific deal — for retailers.
On average, stores with credit card programs see their cardholders spend more and shop more frequently than the average customer, according to an analysis by First Annapolis Consulting. For some retailers, branded credit card programs account for more than 50% of annual sales.
But there are significant downsides:
They can hurt your credit. Store cards tend to come with very low credit limits, meaning you can come close to maxing them out in a single trip. If you’re already starting with shaky credit, using too much of your available credit could damage your scores further.
They come with high interest rates. Retail cards tend to charge interest rates of 20% to 30% — higher than the typical general-purpose card. If you carry a balance, those interest charges will quickly outweigh any discounts you might receive, and could land you in a debt cycle.
Their deferred interest deals can be dangerous. Store cards that offer “no interest if paid in full” by a certain time sound like 0% APR cards, but they’re not. They’re deferred interest offers. With these cards, you can end up being charged hundreds of dollars in retroactive interest if you don’t have your balance completely paid off.
Still want to apply for a store card? Be careful
If you’re jumping on the retail card bandwagon this holiday season, you can still come out ahead on savings — but it takes some effort. Follow these steps to protect your finances:
Make a list of your due dates. “Enjoy your time with your family, but when you get that credit card statement, make sure you’re making those payments,” Verma says. If you miss your due dates, you could rack up late fees. And after 30 days, a missed payment will hurt your credit.
Don’t go overboard. If your neighbor’s overly ambitious holiday light display is better than yours, just say, “Nice job.” Don’t run up the balance on your store card just to stock up on caroling, light-up, robot snowmen. To protect your credit score, use less than 30% of your available credit on your credit cards at all times.
Swear off balances for good. The holidays are a time of indulgence — but when it comes to store cards, discipline matters. Make a habit of paying your cards in full every month, no matter what. You’ll save a bundle on interest charges and start the new year with less debt.